A popular guardian.co.uk report is making the rounds, even among economists, to the effect that China wrecked the prospective Copenhagen deal. I think the famous Pogo cartoon is more on the mark -- "We have met the enemy and he is us!" We economists have yet to come up with a win-win proposal based on recognition of the following:
Best wishes for progress on these problems in 2010.
- Leakage costs are a decreasing and convex function of the percent of the global economy in the mitigating coalition. Existing estimates of leakage costs omit dynamic and strategic effects, including those implied by the green paradox argument.
- Similarly, mitigation costs are a decreasing and convex function of the percent of the global economy (by sector) covered by the mitigation policy.
- Conceding separate payments for carbon sequestration and reduced emissions on forested and agricultural lands, instead of as part of an integrated mitigation agreement, throws away an instrument for making the agreement win-win.
- Relatedly, enabling appeals to historical responsibility may assuage guilt but undermines the prospect for a win-win agreement.
- Many countries, especially
, have more to gain from not signing than signing a partial and limited agreement, even if they plan to join a coalition later on better terms. It may be prudent to hold out while most other countries are (de jure or de facto) holdouts and trade sanctions are weak. China
- Arguments about Mankiw and friends making the perfect the enemy of the good disguise how easy it is for political forces to turn a potentially good agreement into a welfare-reducing one. Lobbying for permit giveaways (instead of recycling the revenue from carbon taxes or auctioned permits) is one example. Loading up the legislation with mandates and subsidies is another.
- Finally, we have not solved the problem of designing optimal hybrid carbon-price schedules for stock externalities under two-sided uncertainty. For example, what should be the quantity and the minimum price of the reserve allowances in a reconciled Waxman-Markey/Kerry-Boxer?